RvMay (Appellant)(On Appeal from the Court of Appeal (Criminal Division))

REPORT

Counsel

Appellants:

Andrew Campbel-Tiech QC

Gavin Irwin

(Instructed by Pattichi Hill & Croques)

Respondent:

Oliver Sells QC

Ivan Pearce

(Instructed by Revenue and Customs Prosecutions Office)

Hearing dates:

10-12 MARCH 2008

ON

WEDNESDAY 14 MAY 2008

REPORT

from the Appellate Committee

14 MAY 2008

R v May (Appellant) (On Appeal from the Court of Appeal (Criminal Division))

ORDERED TO REPORT

The Committee (Lord Bingham of Cornhill, Lord Phillips of Worth Matravers, Baroness Hale of Richmond, Lord Carswell, and Lord Brown of Eaton-under-Heywood) have met and considered the cause R v May. We have heard counsel on behalf of the appellant and respondent.

1. This is the considered opinion of the Committee.

2. This is the first of a trilogy of appeals relating to the confiscation of criminal assets. They raise important questions on the interpretation and application of the statutes which, at the relevant times, governed this matter. To avoid unnecessary repetition the committee will, in this opinion, give a broad overview of the legislative schemes in force from time to time, and review a number of the leading authorities. Much of this material is relevant, and will be the subject of cross-reference, in the succeeding appeals, Crown Prosecution Service v Jennings [2008] UKHL 29 and R v Green [2008] UKHL 30. This opinion addresses only the case of this appellant, Mr May.

The Facts

3. On 24 September 2001 in the Central Criminal Court before Judge Samuels QC, the appellant pleaded guilty to a count of conspiracy to cheat contrary to section 1(1) of the Criminal Law Act 1977. On 3 October 2001 he was sentenced to five years imprisonment. On 2 August 2002 a confiscation order was made against him in the sum of £3,264,277 with six years imprisonment in default of payment under the Criminal Justice Act 1988 as amended. On 28 January 2005 the Court of Appeal [2005] 1 WLR 2902 (Keene LJ, Hodge J and Judge Jones QC) allowed his appeal against sentence to the extent of substituting for the original sentence of five years a sentence of four years imprisonment; his appeal against the confiscation order was dismissed, and is the subject of this appeal.

4. The conspiracy involved the wrongful withholding and reclaiming of VAT from HM Customs & Excise, resulting in a loss to public funds of around £11m. There were a number of other conspirators, some before the court, some not. Limited companies had been incorporated solely for the purpose of dishonestly retaining and reclaiming the VAT on sales of high value computer processing units (CPUs). Between February 1999 and September 2000 four such companies in turn imported CPUs from the European Union, no VAT being payable on importation. The goods were then sold on to a trader in the UK, thereby attracting a liability to VAT at the standard rate of 17.5%. The UK trader (also party to the fraud and commonly known as the buffer company) ostensibly paid the purchase price plus VAT for the goods. The dishonest import company (commonly known as the missing trader), however, instead of accounting for the VAT received, retained it and then disappeared as a trading entity before enforcement action could be taken. The UK trader would then export the same goods (another zero-rated supply) back to the dishonest foreign supplier and itself reclaim the VAT which it had ostensibly paid to the importing company. This practice, with each importing company disappearing after a short trading life, is known as a missing trader or carousel fraud. It is a prevalent form of fraud, causing (the committee was told) very large losses to public funds. There were four phases of this conspiracy, referable to each of the four successive missing trader companies.

5. The appellant himself joined the conspiracy about halfway through and was involved only with the last two phases. With regard to these phases, however, he was found to be a joint principal, indeed the driving force, behind the fraud.

6. The VAT unaccounted for during phases 3 and 4 totalled £4,439,533. In determining the extent of the appellants benefit, however, the judge subtracted from that figure sums amounting to £1,175,256 in respect of monies recovered from the missing traders bank accounts and the proceeds of sale of a number of CPUs by the court-appointed receiver, leaving a net figure of £3,264,277. (It is now common ground that the judge erred in reducing the benefit figure in this way: he was confusing benefit with realisable assets.) The judge valued the appellants realisable assets at £3,887,198, an amount exceeding the benefit figure. He accordingly made the confiscation order in the full sum of £3,264,277.

Background

7. In R v Cuthbertson [1981] AC 470 the House held, with an expression of considerable regret (p 479), that the power of forfeiture and destruction conferred on the court by section 27 of the Misuse of Drugs Act 1971 did not provide a means of stripping professional drug-traffickers of the whole of their ill-gotten gains or the total profits of their unlawful enterprises. This decision prompted the establishment of a committee under the chairmanship of the Hon Mr Justice Hodgson to assess how far the powers of criminal courts met the need to strip offenders of their ill-gotten gains. In its report on The Profits of Crime and their Recovery published in 1984 the committee considered (pp 8, 11) means of depriving offenders of the fruits of crime and of seeking to ensure that crime did not pay. The committees objective was to restore the status quo before an offence had been committed and recommended that the courts should have power to make confiscation orders, but recommended that only the net profits of offending should be confiscated (pp 74-75, and p 151, recommendation 12).

8. Full legislative effect was not given to the committees recommendations on confiscation, but the report led to the enactment of a series of statutes directed to confiscation of the proceeds of criminal offending. The series began with the Drug Trafficking Offences Act 1986, and there followed (among the more important statutes) the Criminal Justice Act 1988, the Criminal Justice (International Co-operation) Act 1990, the Criminal Justice Act 1993, the Drug Trafficking Act 1994, the Proceeds of Crime Act 1995 and the Proceeds of Crime Act 2002. In these statutes the original confiscation regime established by the 1986 Act was modified, extended, elaborated and tightened, and effect was given to the obligations of the United Kingdom under the Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime (1991). But despite much refinement and differences between the 1986 and 1994 Acts on the one hand and the 1988, 1993 and 1995 Acts on the other, the essential structure of the 1986 regime has been retained. It requires the court, before making a confiscation order, to address and answer three questions: see R v Johnson [1991] 2 QB 249, 252-255; R v Dickens [1990] 2 QB 102, 105-106. The first question is: has the defendant (D) benefited from the relevant criminal conduct? If the answer to that question is negative, the inquiry ends. If the answer is positive, the second question is: what is the value of the benefit D has so obtained? The third question is: what sum is recoverable from D? In some cases (such as R v Chrastny (No 2) [1991] 1 WLR 1385, R v Walls [2003] 1 WLR 731 and R v Ahmed [2005] 1 WLR 122) there may be no dispute how one or more of these questions should be answered, but the questions are distinct and the answer given to one does not determine the answer to be given to another. The questions and answers should not be elided.

9. Although confiscation is the name ordinarily given to this process, it is not confiscation in the sense in which schoolchildren and others understand it. A criminal caught in possession of criminally-acquired assets will, it is true, suffer their seizure by the state. Where, however, a criminal has benefited financially from crime but no longer possesses the specific fruits of his crime, he will be deprived of assets of equivalent value, if he has them. The object is to deprive him, directly or indirectly, of what he has gained. Confiscation is, as Lord Hobhouse of Woodborough observed in Inre Norris [2001] UKHL 34, [2001] 1 WLR 1388, para 12, a misnomer.

The first question: benefit

10. Section 1(2) of the 1986 Act required the court first to determine whether D had benefited from drug trafficking, to which alone the Act was directed, and it was provided (section 1(3)) that for the purposes of the Act a person who had at any time received any payment or other reward in connection with drug trafficking carried on by him or another had benefited from drug trafficking. Any payments or other rewards received at any time in connection with drug trafficking were his proceeds of drug trafficking (section 2(1)(a)), and for the purpose of determining whether he had benefited the court was entitled, but not bound, to make certain assumptions about (among other things) the source of his property and expenditure (section 2(2),(3)) save to the extent that such assumptions were shown to be incorrect in the defendants case.

11. Part VI of the Criminal Justice Act 1988, applicable to crimes other than drug trafficking, empowered the courts to make confiscation orders requiring the defendant to pay such sum as the court thought fit if satisfied that a defendant had benefited from an offence or offences in at least a minimum amount (section 71(1),(2),(3)). He had benefited (section 71(4)) if he had obtained property as a result of or in connection with the commission of the offence or offences, and if (section 71(5)) he had derived a pecuniary advantage as a result of the offending he was to be treated as if he had obtained a sum of money equal to the value of the pecuniary advantage. Property was very broadly defined in section 102(1) of the Act to include money and all other property, real or personal, heritable or moveable, including things in action and other intangible or incorporeal property.

12. Section 1(2) and (3) of the 1986 Act were re-enacted in section 2(2) and (3) of the 1994 Act, so that the courts duty to determine whether a defendant had benefited, and the definition of benefited", remained unchanged. Section 4(1) of the 1994 Act re-enacted the provision in section 2(1)(a) of the 1986 Act, but whereas the court had been entitled but not bound to make certain assumptions under section 2(2) and (3) of the 1986 Act, the court was now, under section 4(2)(a) and (3) of the 1994 Act, obliged to do so. The court was not, however, to make such an assumption (section 4(4)) if the assumption were shown to be incorrect in the defendants case or if the court were satisfied that there would be a serious risk of injustice in a defendants case if the assumption were to be made.

13. The 1995 Act made certain amendments to section 71 of the 1988 Act, substituting new provisions for subsections (1)-(3). One effect of this was to remove the discretion of the court in section 71(1) of the 1988 Act to make an order requiring payment of such sum as the court might think fit. Under subsection (1A) as substituted the court was first to determine, as under the drug trafficking legislation, whether the defendant had benefited from any relevant criminal conduct. The provisions of section 71(4) (defining benefit) and (5) (relating to the deriving of a pecuniary advantage) were retained. New provisions extended the regime to cover a course of criminal conduct (section 2, inserting a new section 72AA), and in this context certain assumptions might be made, but not if such an assumption was incorrect or liable to cause injustice.

14. The 2002 Act brought together the regimes, hitherto distinct, originally established by the 1986 and 1988 Acts, and provided for the making of confiscation orders against those found to have a criminal lifestyle. Thus under section 6(4)(a) of this Act the court must first decide whether the defendant has a criminal lifestyle. If so, the court must decide (section 6(4)(b)) whether he has benefited from his general criminal conduct. If not, it must decide (section 6(4)(c)) whether he has benefited from his particular criminal conduct. Section 76(4)-(6) define the meaning of benefit. Thus subsection (4), borrowing the language of section 71(4) of the 1988 Act, provides that a person benefits from conduct if he obtains property as a result of or in connection with the conduct. Subsection (5), echoing section 71(5) of the 1988 Act, provides that if a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage. Subsection (6) provides that references to property or a pecuniary advantage obtained in connection with conduct include references to property or a pecuniary advantage obtained both in that connection and some other. Property is broadly defined in section 84(1) to mean all property wherever situated including money, all forms of real or personal property, things in action and other intangible or incorporeal property.

15. For obvious reasons of chronology the earliest authorities pertinent to this first question arose under the 1986 Act and the courts rightly endeavoured to decide whether, applying the language of the statute and the statutory presumptions when and as appropriate, the defendant had received any payment or other reward in connection with drug trafficking carried on by him or another. In R v Osei (1988) 10 Cr App R (S) 289 the appellant was held to have done so. She was a drug courier armed, it seems, with a sum of cash to enable her to show that she could support herself in order to enter the country, and the court held (p 293) that payment was apt to cover not merely a profit or fee but also a payment of this kind. The same interpretation was applied in R v Smith (Ian) [1989] 1 WLR 765, 769, where any payments were held to mean any payment in money or in kind, not net profit after deduction of expenses. This interpretation was applied again in R v Simons (1993) 98 Cr App R 100. In that case the appellant had bought five consignments of drugs from a Hong Kong supplier and sold them on to an African buyer, from whom in each case he had received the purchase price which he had paid on to the supplier. The proceeds of sale, the Court of Appeal held (p 102), were not profit made in the sale but the sale price. The court regarded it as clear (p 104) that where there is a chain of contracts each purchase price is a payment. The court went on to observe, obiter (p 104), that this result could not be avoided by treating the intermediary as a postman, and those acting as a conduit should not be treated differently. But this, with respect, is more problematical: under the 1986 Act the first question was always whether, on the facts (and allowing permissible inferences) the defendant had benefited by receipt of any payment or other reward, which a mere intermediary might possibly not. It does not necessarily follow from the mere possession of drugs that a person is not a mere minder or custodian: see R v J [2001] 1 Cr App R (S) 273; R v Johannes [2001] EWCA Crim 2825, [2002] 2 Cr App R (S) 109. In R v Banks [1997] 2 Cr App R (S) 110 the Court of Appeal again held, applying the 1994 Act, that sections 2(3) and 4(1) were directed to gross payments and not net profits.

16. In R v Gokal (unreported, 7 May 1997, Buxton J) the judge had to consider the meaning of section 71(4) of the unamended 1988 Act. He held that section 71(4) requires what can fairly be described as an obtaining by the defendant himself and that the obtaining of property under section 71(4) must be by the defendant personally". These statements are not incorrect, but they should not, with respect, be understood as excluding joint receipts from the operation of the section, nor cases where payment is made to a third party at the behest of the defendant.

17. R v Simpson (David) [1998] 2 Cr App R (S) 111 is a more difficult case. Simpson pleaded guilty to conspiring to possess the proceeds of drug trafficking. He had made five trips to Ireland taking with him a total of £2.5m, the proceeds of drug trafficking. He had been paid £25-30,000 for each trip and on arrest en route to Dublin had £540,000 with him. The trial judge found that he had benefited from drug trafficking to the extent of £3m. He assessed the proceeds of drug trafficking (p 116) as equivalent to the aggregate value of the drugs deals and not the aggregate value of the rewards paid to the money launderers for their money laundering, basing himself on R v Simons, above. The Court of Appeal, following R v Banks, above, accepted (pp 117-118) that there might be multiple recovery if the same sum passed through the hands of successive dealers, but found no reason (p 118) to construe the definition of proceeds of drug trafficking as requiring as a pre-condition that property or other reward should pass to a defendant. It may be agreed that words, not in the statute, should not be read into it. But the question under sections 2(3) and 4(1) of the 1994 Act is whether a defendant has received any payment or other reward in connection with drug trafficking, and this will ordinarily require a payment or reward to him, whether on his own or jointly.

18. No such problem arose in R v Moran [2001] EWCA Crim 1770, [2002] 1 WLR 253, a case under the unamended 1988 Act. The defendant, a market trader, had cheated the Inland Revenue by failing to disclose profits. A confiscation order had been made in the amount of tax underpaid plus interest. This was rightly held to be the pecuniary advantage, within the meaning of section 71(5), which the defendant had obtained. R v Smith (David) [2001] UKHL 68, [2002] 1 WLR 54, arising under section 71(1A) (4) and (5) of the amended 1988 Act, raised a very similar point. The defendant had pleaded guilty to fraudulent evasion of excise duty. Duty of some £130,000 should have been, but had not been, paid on the importation of a consignment of cigarettes. The defendant had been liable to pay the duty, as evidenced by his plea of guilty, and the House held, for reasons given by Lord Rodger of Earlsferry, that the defendant derived a pecuniary advantage at the moment when he imported the cigarettes, irrespective of what happened to them later. A similar result was reached by the Court of Appeal in R v Ellingham [2004] EWCA Crim 3446, [2005] 2 Cr App R (S) 192.

19. In R v Olubitan [2003] EWCA Crim 2940, [2004] 2 Cr App R (S) 70, a case under the amended 1988 Act, the defendant was convicted of conspiracy to defraud. At the confiscation hearing he was found to have benefited to the extent of £123,000 and an order was made in the smaller sum of £88,000. The evidence, however, showed that he had joined the conspiracy on the day that police action brought it to an end by interception of a dummy consignment arranged to trap the conspirators. On these facts the Court of Appeal rightly held that the defendant had obtained nothing from his participation in this conspiracy, observing (p 78) that section 71 (1A) and (5) are

not to be construed so that a person may be held to have obtained property or derived a pecuniary advantage when a proper view of the evidence demonstrates that he has not in fact done so".

The second question: the value of the benefit

20. Section 2(1)(b) of the 1986 Act provided that the value of a defendants proceeds of drug trafficking was to be the aggregate of the values of the payments or other rewards he had received at any time in connection with drug trafficking carried on by him or another. For the purpose of assessing the value of these proceeds the court was entitled but not bound to make the assumptions referred to in para 10 above (section 2(2), (3)). The aggregate of the defendants proceeds was, prima facie, the amount ordered to be paid under the confiscation order (section 4(1)).

21. Section 71(4) of the 1988 Act provided that the defendants benefit was the value of the property he had obtained as a result of or in connection with the commission of the relevant criminal offence, and the value of a pecuniary advantage (section 71(5)) was the money value of that advantage.

22. Section 4(1)(b) of the 1994 Act, following section 2(1)(b) of the 1986 Act, provided that the value of a defendants proceeds of drug trafficking should be the aggregate of the values of the payments or other rewards he had received at any time in connection with drug trafficking. As when determining whether a defendant had benefited from drug trafficking, the court was now required when assessing the proceeds of drug trafficking to make the assumptions referred to in para 10 above, but not where such an assumption was shown to be incorrect or the making of it liable to cause injustice. Property was broadly defined in section 62(1), following section 102(1) of the 1988 Act, and (section 63(2)) anything received in connection with drug trafficking included a reference to anything received both in that connection and in some other connection.

23. In section 72AA, inserted into the 1988 Act by section 2 of the 1995 Act, the court was required, in assessing the value of the defendants benefit from a course of criminal conduct, to make the assumptions referred to, save in the circumstances already noted.

24. Section 76(7) of the 2002 Act simply provides that if a person benefits from conduct his benefit is the value of the property obtained. This simplicity is, however, to some extent deceptive, since sections 79-80 contain detailed rules, which need not for present purposes be summarised, for assessing the value of property obtained.

25. It is unsurprising, given the severity of the potential consequences, that the answering of this second question has given rise to many problems, some of detail which do not call for mention here, and some of principle which do. In R v Dickens [1990] 2 QB 102 the Court of Appeal (per Lord Lane CJ) explained the operation of the confiscation regime under the 1986 Act (although his observations on the standard of proof were later reversed by statute) and the reliance that might be placed on the statutory assumptions.

26. In several cases the court has been called upon to evaluate the benefit accruing to a defendant who had obtained a mortgage loan by making a fraudulent misstatement. In Re K (unreported, 6 July 1990, McCullough J), in the context of an order applied for under the 1988 Act to restrain the defendant from disposing of his assets in anticipation of a confiscation order, the judge rejected the defendants submission that the benefit he had obtained was the equity of redemption in the house he had bought rather than the house itself. That decision was followed by the Court of Appeal in R v Layode (unreported, 12 March 1993, per Macpherson J), another decision under the unamended 1988 Act. It must, however, be appreciated that section 71(4) called for an essentially factual enquiry: what is the value of the property the defendant obtained? If (say) a defendant applies £10,000 of tainted money as a down-payment on a £250,000 house, legitimately borrowing the remainder, it cannot plausibly be said that he has obtained the house as a result of or in connection with the commission of his offence. This was the conclusion correctly reached by the Court of Appeal in R v Walls [2002] EWCA Crim 2456, [2003] 1 WLR 731. That was a case under the 1994, not the 1988, Act, but in distinguishing the earlier decisions the court relied not on the differences between the two confiscation regimes (see para 27) but on the considered reasoning of Neill LJ in the earlier Court of Appeal decision in R v Johnson [1991] 2 QB 249, which had not been cited in the earlier cases.

27. In R v Porter [1990] 1 WLR 1260 the defendant and a co-defendant pleaded guilty to drug offences. At a hearing to determine to what extent they had benefited from their drug trafficking the trial judge found as a fact that the two had jointly benefited in accordance with section 1(2) of the 1986 Act, that the extent of that benefit was £9,600 and that they should jointly and severally be ordered to pay that sum. The issue before the Court of Appeal (p 1262) was whether the confiscation order could properly be joint and several, or whether it should be several, with each of them being required to pay £4,800. It was held (p 1263) that the Act did not contemplate joint penalties, that the court must, as between co-defendants, determine their respective shares of any joint benefit that they might have received as a result of their drug trafficking, and that in the absence of any evidence the court was entitled to assume that they were sharing equally. So the orders were quashed and several orders for £4,800 substituted in each case. This might, as later authorities show, have been a proper disposal had there in fact been no evidence of the parties shares in the proceeds. But the judges finding, not challenged on appeal, was that the proceeds had been received jointly. That being so each had received a payment or other reward in the full sum of £9,600 and orders in that sum should have been made against each of them severally.